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2 Gms690 - Module 2.1 - Trade & Trade Theory
2 Gms690 - Module 2.1 - Trade & Trade Theory
MANAGEMENT
*Source: Gupta, Govindarajan, and Wang (2008), p. 28. Copyright 2020 Mark Viminitz
Three Stages of Globalization
• The first Global Economy 1880-
1929
• The second Global Economy
1930-1979
• The third Global Economy 1970
– Present
• Politics played a significant role
in the waves presented in the
graph
POLITICAL IMPACT
1914 WWI – 1917 Russian Revolution – The Great Depression 1929
1939 WWII – 1940 China Communist Revolution
ISOLATIONISM - PROTECTIONISM
Source: http://www.atlas101.ca/pm/concepts/deglobalization/
Copyright 2020 Mark Viminitz
Global Value Chain
• A global value chain
occurs when the
different segments
of their production
process are located in
different parts of the
world
Source: https://www.investopedia.com/insights/what-is-international-trade/
Copyright 2020 Mark Viminitz
Defining International Trade
• Industrialization, advanced
transportation, globalization,
multinational corporations, and
outsourcing are all having a major
impact on the international trade
system.
• Increasing international trade is
crucial to the continuance of
globalization.
• Without international trade, nations
would be limited to the goods and
services produced within their own
borders.
Source: https://efinancemanagement.com/international-financial-management/international-
trade#:~:text=There%20are%20three%20types%20of,Import%20Trade%20and%20Entrepot%20Trade .
Copyright 2020 Mark Viminitz
Free Trade Theory
• Trade Theory tries to explain
several facts about trade.
• In its purest form governments
impose absolutely NO tariffs,
taxes, or duties on imports, or
quotas on exports.
• It shows why it is beneficial for a
country to engage in
international trade even for
products it is able to produce
itself.
• Trade Theory is divided between https://www.youtube.com/watch?v=J-qGCZ4wmxs
Classical and Modern.
Source: https://wernerantweiler.ca/blog.php?item=2018-06-25
Copyright 2020 Mark Viminitz
Trade Theories – Absolute Advantage
Adam Smith - Scottish philosopher and economist
• Wealth of Nations 1776 considered one of the
most influential books ever written
• Transitioned away from the theory of Mercantilism
• Argued that in free exchange, both sides became
better off
• Both buyer and seller profits. Imports are just as
valuable as exports
• Trade benefits both sides a nations wealth is not
the quantity of gold and silver in its vaults, but the
total of its production and commerce
• The basis of Gross National Product - GNP
GNP and GDP both reflect the national output and income of an economy. The main difference is
that GNP (Gross National Product) takes into account net income receipts from abroad.
Source: https://www.adamsmith.org/the-wealth-of-nations
Copyright 2020 Mark Viminitz
Trade Theories
Absolute Advantage
• Theory focuses on a countries
ability to produce a good more
efficiently than other nations
• Trade should not be regulated
or restricted by government
policy or intervention
• Trade would flow naturally
according to market forces
• Production becomes more
efficient
Source: https://www.adamsmith.org/the-wealth-of-nations
Copyright 2020 Mark Viminitz
Trade Theories
Scenario:
If there was NO trade
Source: https://www.adamsmith.org/the-wealth-of-nations
Copyright 2020 Mark Viminitz
Trade Theories
Source: https://www.adamsmith.org/the-wealth-of-nations
Copyright 2020 Mark Viminitz
Trade Theories
Scenario:
Each country specializes
Source: https://www.adamsmith.org/the-wealth-of-nations
Copyright 2020 Mark Viminitz
Trade Theories
Source: https://www.adamsmith.org/the-wealth-of-nations
Copyright 2020 Mark Viminitz
Trade Theories
Conclusion:
Total Trade Increases
Source: https://www.adamsmith.org/the-wealth-of-nations
Copyright 2020 Mark Viminitz
Trade Theories
Absolute Advantage
• Exercises
• Who has Absolute
Advantage
https://www.youtube.com/watch?v=-7co04C8l-c
Source: https://www.economicshelp.org/blog/glossary/absolute-advantage/
Copyright 2020 Mark Viminitz
Trade Theories
Absolute Advantage
• Underlying Assumptions
• Factors of Production
cannot move between
countries
• No Trade barriers
• Assumes exports =
imports
• No economies of scale
Source: https://www.intelligenteconomist.com/absolute-advantage/
Copyright 2020 Mark Viminitz
Trade Theories
• Factor Mobility refers to the ability to move factors of production -
labor, capital or land - out of one production process into another.
• Factor mobility may involve the movement of factors between firms
within an industry.
• When one steel plant closes but sells its production equipment to another steel
firm.
• Mobility may involve the movement of factors across industries within
a country
• When a worker leaves employment at a textile firm and begins work at a
automobile factory.
• Finally mobility may involve the movement of factors between
countries either within industries or across industries.
• When a farm worker migrates to another country or when a factory is moved
abroad.
https://www.youtube.com/watch?v=ZbOHzKMjsDI
https://www.youtube.com/watch?v=L5HlR07nt8g
Source: https://www.intelligenteconomist.com/economies-of-scale/
Copyright 2020 Mark Viminitz
Trade Theories
New Trade Theory
• Returns or Economies
to Scale
• Decreases Avg. Costs
• Secures more Markets
• Monopolistic
• Creates Barriers to Entry
• Profitability
• FDI Advantage
• Protectionist Advantage
building huge industrial
base to dominate markets
Source: https://www.intelligenteconomist.com/economies-of-scale/
Copyright 2020 Mark Viminitz
Trade Theories
Product Life Cycle Theory
• Explains the various stages
that a product goes through
after it enters the market. Raymond Vernon
• Four stages
1. Introduction Phase –
characterized by investment
and low profits
2. Growth Phase – rapid adoption,
decrease in costs, and high
profits
3. Maturity Phase – competition,
lower prices less profits
4. Decline Phase – saturated
market, low investment
Source: https://saylordotorg.github.io/text_international-business/s06-01-what-is-international-trade-th.html
Copyright 2020 Mark Viminitz
Trade Theories
Global Strategic Rivalry
Theory
• MNC’s efforts to gain a
competitive advantage
against other global firms in Paul Krugman
their industry
• Creation of “barriers to entry”
(R&D, IP, economies of scale,
processes, control of
resources) Kevin Lancaster
• Development of Strategic
Alliances
• Mergers and Acquisitions